The incident sparked tension in the area as a group of locals staged a violent protest demanding the body of the deceased militant, police said.
The protesters set ablaze two police mobile bunkers, prompting the cops to resort to a baton-charge and fire teargas shells to restore law and order.
An Army spokesman said that the encounter took place during a search operation by security forces in the forest area of Aripal village, 45-km from here, following information about the presence of militants there.
The spokesman said that one ultra has been killed so far in the operation, which is continuing.
"The body of the militant has been recovered along with one AK-47 rifle," the spokesman said.
An Army jawan was also injured during the operation, he added.
Police identified the slain militant as Madani Bhai, a Pakistani national belonging to the JEM outfit.